Where Have All the Flowers Gone?

With the war in Ukraine entering its third year, a peaceful resolution looks as distant a prospect as one in the Middle East. Putin is seeking re-election – a guaranteed outcome, has put Russia’s economy on a war footing, and is hoping that Donald Trump wins the US presidential election.

Over the weekend, President Volodymyr Zelenskiy suggested Russia is preparing a new offensive against Ukraine, starting in the Spring. With the West’s indecision in the face of political shenanigans and some war weariness, unlikely as it seems currently, a peace deal seems the only way the war can end in Ukraine. While this would be a great relief, it would still leave Russia and NATO in a new Cold War era.

However, should a peace deal become possible, there is a major stumbling block. Who will pay for the re-construction of Ukraine? The estimated cost of re-building Ukraine could be well in excess of $400bn.

The EU recently reached an agreement on a first step towards using profits from frozen Russian assets to help pay for re-building war-damaged Ukraine. The EU originally froze some €200bn of Russian central bank assets, with 90% of these held by Euroclear in Belgium. The EU is now discussing the potential confiscation of the assets themselves. PM Rishi Sunak has gone so far as to urge the West to be more aggressive in seizing frozen Russian assets and passing the proceeds on to Ukraine to finance its defence. Likewise, the Biden administration is reported to be increasingly in favour of the outright confiscation of all Russian assets frozen by the G7, which could be over $300bn.

However, if the West does seize Russian assets, how will those nations with their safe-haven reserves in western banks react? UK bankers are concerned by David Cameron’s plans to seize some £26bn held in the UK as it could backfire if it was to have a bigger psychological impact in other countries. One of the bankers said ‘it could cause a liquidity crisis greater than that seen in 2008 and trigger a global recession.’

Putin is unlikely to accept the EU’s Ukraine reconstruction plan using frozen Russian assets. Russian officials have already said any attempt to confiscate Russia’s assets will lead to years of legal challenges. To add to the uncertainty, what will Donald Trump do if he wins the presidential election?

Perhaps it’s a case of dealing with one problem at a time? First, there must be an end to the fighting. The solution to re-building Ukraine will be the next challenge, but it could be far from straight-forward, and expect Russian-NATO relations to remain ice cold.

Sadly, the battlefields of Ukraine are likely to remain a blood bath for the foreseeable future.

What have we been watching?

Markets continue to adjust to the likely timing of the first US interest rate cut. Expectations are shifting from May to June with the chances of a cut lowered to 30% and 60% respectively. This follows the ’hot’ January inflation numbers and subsequent US factory prices (PPI) data. However, the US NASDAQ index touched an all-time high, receiving a boost from AI chipmaker Nvidia’s results where the CEO said AI had reached a tipping point with demand surging across companies, industries, and nations. Meanwhile, Chinese interest rates were lowered, but markets are still waiting for a major stimulus package to address the economy’s problems. However, Japanese equities hit an all-time closing high.

As the conflict in the Middle East continues there appears to be no end in sight to the risk to global shipping in the region, if anything, it is becoming even more dangerous. Houthi rebels are now using unmanned submarines and drone boats as well as missiles. Last week, a Belize-flagged, British-registered cargo ship had to be abandoned by its crew after an attack in the Gulf of Aden. The disruption to global supply chains still looks manageable but could feed through into higher producer prices – something central bankers might not welcome. Container lines are reported to be struggling with port congestion and ship shortages as vessels are turning up on the wrong days due to scheduling problems arising from the Red Sea crisis.

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In the UK, there appears to be a change in tone developing from the Bank of England (BoE). Governor Andrew Bailey speaking to the Parliamentary Treasury Committee said that it ‘does not need inflation at target rate before a rate cut, the economy is showing distinct signs of an upturn and market bets on rate cuts are not unreasonable.’ Meanwhile, Andy Haldane, former BoE Chief Economist, reiterated his belief that the BoE should already be cutting interest rates and is at risk of deepening the recession if it does not. Meanwhile, OFGEM has announced that the energy price cap will fall by 12.3% due to weak wholesale gas prices, which should be reflected in the April inflation numbers. However, the ‘flash’ composite PMI business activity indicator for February was better than expected at 53.3 with manufacturing at 47.1 countered by services at 54.3. However, this also showed rising wage costs and a renewed acceleration in prices-charged inflation, which may give the BoE something to think about.

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In Europe, Germanys’ Economy Minister Robert Habeck said the ‘German economy is in rough waters as the country is coming out of the crisis more slowly than we hoped.’ The slower growth in global trade has made it more challenging for an export nation like Germany, while higher interest rates have affected company investment.

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In the US, the Federal Reserve published the minutes of its January meeting, which showed that ‘most participants noted the risks of moving too quickly to ease the stance of policy and emphasised the importance of carefully assessing data in judging whether inflation is moving down sustainably to 2%.’ Meanwhile, growth in business activity slowed a little in February as the ‘flash’ composite PMI slipped to 51.4. Within this, US manufacturing activity reached the highest level in 17-months, while the service sector slipped slightly.

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Japan’s main stock index hit an all-time closing high, surpassing the previous record at the end of 1989. Even though Japan’s economy slipped into technical recession at the end of 2024 investors have focused on instead encouraging corporate earnings and the weakness of the Japanese Yen which is helping its manufacturers.

 

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China’s Lunar New Year holiday spending climbed past pre-pandemic levels. Domestic spending on entertainment, dining, and travel all increased during Golden Week. China’s central bank cut the five-year prime loan rate – a key benchmark lending rate used for pricing mortgages – from 4.2% to 3.95%. While helpful, China’s property problem is ultimately not tied to mortgages.

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Brent oil nudged slightly lower to $81 given the continuing mild weather across Europe.

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Finally, is Donald Trump feeling the squeeze? Just days after a judge ordered him to pay $335m to New York State for falsely inflating the value of his properties, he launched his own line of Trump-branded gold training shoes, which are selling online for $399. Given the size of the fine, that is an awful lot of trainers he needs to shift! Let us hope his footwear sales forecasting is more accurate than his attempt at real estate valuation!

Read Last Week’s Alpha Bites – America First – The Sequel

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.